It’s Sunday, June 30th, a marvelous day in Langley, WA and I sit here typing and calculating from my office while an excellent jazz group is playing very danceable music at one of the local coffeeshops. I watch dozens of tourists and locals lounging about, and yet I sit here and type. Why? Because I take my exercises seriously. Today is the end of the first half of the year. Every six months I review my portfolio in an exercise inspired by Peter Lynch. Basically, know why you own the stocks you own, and check back on their stories to see if their story has diverged from your intent. I do this via a series of short paragraphs posted to discussion boards because: 1) the best measure of whether I understand something is whether I can explain it to someone else, and 2) by making my reviews public I can learn from others’ feedback and they may learn from me. This blog acts as a summary and a collection of the links. But again, why do this on such a nice day? So I can eventually afford to do what everyone else is doing (except for June 30th and December 31st of course.)

Did you know I wrote a book about this stuff? Dream. Invest. Live. is my personal perspective on personal finance, and is a mix of my experience, insights from Your Money Or Your Life, and strategies from One Up On Wall Street. My book had the unfortunate timing to come out as the market crashed a few years ago. My portfolio had the unfortunate timing to be called upon after I bought my first true home as my business had yet to gain traction. The sales have been understandably embarrassingly slow; but, while many expect me to disassociate myself from what I wrote, I find myself more confident that it is written well, is valid, and informative (as others have told me.) As several financially literate friends have comforted me, their analyses agree that I’ve just been hit with a perfect storm of bad luck. For now.

My preferred analysis for a stock is “Present Value of Future Revenues Discounted for Risk.” I intended to do such an analysis for each stock until I pulled up their financials. Something is definitely amiss. We’ve had years of irrational markets and my stocks, and probably many small cap stocks, continue to experience the symptoms. I realized that some of these stocks, er, all of my stocks, are so undervalued that I didn’t have to dive into such an analysis. A much simpler analysis meets my immediate goal of finding a possible way to pay off the mortgage (or at least avoid foreclosure) and return to a thriving lifestyle, or at least one that isn’t fraught with worry. If you want the more complicated, yet approachable, analysis, go buy my book – or at least get it from the library.

My simpler analysis looks at two ratios: price/sales and price/book. Price/Sales is the ratio of the stock price (though I use market cap) to the company’s sales. I use sales instead of earnings because earnings are too susceptible to bookkeeping abstractions. Price/Book is basically the company’s net worth per share. If it is one then buying a share of the company is buying a dollar’s worth of assets – sorta. Both ratios can vary greatly depending on the company’s maturity, market, industry, competition, and history.

For my simplest analysis I checked to make sure each had a positive net worth. Good, though shaky in some cases. Then I checked against my preferred P/S of 6. Six is a good conservative number for healthy, mature, growing companies. The average P/S of the companies actually making money from customers was only about one. If those stocks regained those ratios, that portion of my portfolio would increase six-fold. What investor requires more of a return than that? Of the companies that were within a year or so of getting their products into market, reaching a reasonable market cap of one billion dollars would create a ten-fold increase in their value. Granted, a billion is an incredibly rough guess, not even an estimate, but disruptive companies are hard to analyze and can easily attain such values when they are successful.

Currently, my portfolio is enough to pay off my credit card debt, but would leave only a few thousand for emergence funds and my retirement account.

If all of the stocks reached P/S = 6 at current revenues and products, I’d have enough to catch up on the mortgage and even pay off the credit card debt. This is close to what I consider a conservative rational market valuation. It assumes no growth.

The same is true if two of the disruptive stocks, MVIS and GERN, reached market caps of $1B. Then, I’d also have enough for a few more years of living expenses.

If they all reached market caps of $1B, I’d have enough, that if necessary, I could pay off all of my debt and still have savings. This is reasonable if the market was valuing companies and stocks based on the present value of future revenues, which does not seem to be happening for such small companies – though that may be changing.

As I said, valuing disruptive companies is difficult. While my estimates for MVIS are in the incredibly modest range of $640 (only $80 pre-split for you knowledgeable in MVIS), others estimate as high as $1,500. At that price my portfolio is so much greater than “enough” that philanthropy can become a wonderful occupation.

If GERN matches MVIS’s success, well, it will be time to give away lots of money.

So goes the money story. Of the list, only one scenario leaves me with my current worries. It is the current scenario. I considered such a scenario to be unbelievably unlikely, yet here it sits.

There is a time story. Waiting isn’t an option, or at least much of one. Ask my mortgage company. For my portfolio to provide a source of income in time to allow me to keep my home, my portfolio must grow quickly. There is reason to believe this is possible. these undervalued stocks have moved up impressively within the last year. RSOL alone went from $0.40 to over $7.00. It came back down, but its competitor trades forty times higher. There is plenty of room to grow. MVIS’ first major success is hinted at happening within this year, probably the next few months, possibly the next few weeks, and is supposedly going to be followed by up to four such deals within twelve months. The possible foreclosure of my home is working to a similar timing.

Conclusions? I am heartened, but I am also working on a Sunday because where I am is what I have to work with and I’ll only change as good news arrives. Analyses are guesses, and these analyses are cruder than most, yet suggest I don’t need to do more. If I did, each of those scenarios would be even better because the above analyses did not account for subsequent products and premium pricing for closely held stocks.

I encourage you to make up your own mind. Here are links to my descriptions of my remaining holdings (as I fondly look back on FFIV, PIXR, SBUX – and yes, even DNDN.) As I said above, I post these on discussion boards because of the value of the discussions. Read on and speak up! I truly do want to read what you have to say.

One Response to Semi Annual Exercise Mid 2013

Hang in there Tom. At least you have a portfolio. Every stock my husband and I ever purchased or received from a company is worthless, because all of those companies went belly up. Maybe the market will run up faster than the mortgage broker and you will be golden …Thanks for sharing!